October Current Account Surplus of $880 Million 'Barely Positive'... Uncertain Current Account Outlook for Next Year (Comprehensive)

Surplus Drops by $7.13 Billion
Goods Balance Turns Deficit in a Month
Weak Semiconductors, Sluggish Exports to China
Exports Plunge Due to Worsening Performance
Deteriorating External Conditions in US and Europe
Export Decline Expected to Worsen Further

[Asia Economy reporters Seo So-jeong and Moon Je-won] South Korea's current account balance managed to maintain a surplus for two consecutive months in October, albeit with difficulty, thanks to increased dividend income. However, due to a sharp decline in exports amid the global economic slowdown, the goods balance reverted to a deficit after just one month. The global economic slowdown and weakening export competitiveness have caused the goods balance, a pillar of South Korea's economy, to shift into deficit, significantly shaking the current account balance. With exports to China sharply decreasing, sluggish exports of key items such as semiconductors, and unfavorable external conditions including strengthened export barriers in the U.S. and Europe, both the goods balance and current account balance are expected to stagnate for the time being.

According to the "October Balance of Payments (provisional)" released by the Bank of Korea on the 9th, South Korea recorded a current account surplus of $880 million in October. However, compared to the same month last year, the surplus shrank by $7.13 billion. The current account had maintained a surplus for 23 consecutive months from May 2020 through March this year, then posted a deficit of $79.3 million in April, before increasing surpluses of $3.8599 billion in May and $5.698 billion in June. However, the surplus sharply decreased to $791.1 million in July, turned into a deficit of $3.0491 billion in August due to an expanded trade deficit, and barely returned to a surplus of $1.5833 billion in September. The cumulative current account surplus from January to October this year was $24.99 billion, a reduction of $50.43 billion compared to the same period last year.

◆ Semiconductor and Exports to China Worsen... Goods Balance Returns to Deficit = In particular, the goods balance, which posted large deficits in July and August, turned to a surplus in September but reverted to negative again after just one month, showing instability. The goods balance turned to a deficit in October because the global economic slowdown caused exports of semiconductors and chemical products to plummet, while imports of raw materials and capital goods continued to rise sharply. Exports this month amounted to $52.59 billion, down 6% compared to the same month last year. Specifically, except for auto parts (3.9%) and petroleum products (7.0%), most items such as home appliances (-22.3%), semiconductors (-16.4%), and steel products (-12.9%) showed deteriorated performance.

By region, exports to the U.S. (6.6%) and Europe (10.3%) increased, but exports to China (-15.7%) and Southeast Asia (-11.7%), which have large export volumes, saw growing declines. Amid a global reduction in demand due to rising prices and interest rates reducing disposable income, South Korea's economy, highly dependent on exports, has been hit harder by the combined adverse effects of China's "zero-COVID" policy and the prolonged Ukraine-Russia war.

The services balance recorded a slight surplus of $50 million. However, compared to October last year ($640 million), the surplus shrank by $590 million. With COVID-19 related restrictions easing, the travel deficit increased from $460 million to $540 million over one year. The primary income balance surplus ($2.26 billion) increased by $1 billion compared to a year ago ($1.25 billion), influenced by increased dividend income from overseas local subsidiaries.

Kim Young-hwan, head of the Financial Statistics Department at the Bank of Korea, explained, "The goods balance turned to a deficit as exports declined due to the slowdown in major countries' growth and a slump in the information and communication technology (IT) sector." Meanwhile, imports increased by $4.22 billion, continuing an upward trend for 22 consecutive months compared to the same period last year. This was due to increased imports of raw materials (9.9%), capital goods (10.9%), and consumer goods (7.9%). According to the Organisation for Economic Co-operation and Development (OECD), South Korea's import growth is relatively large among major countries.

◆ Current Account Instability to Continue Until First Half of Next Year = The problem is that this trend is likely to continue through the remaining months of November and December this year and into the first half of next year. On the 24th of last month, the Bank of Korea revised its economic outlook, forecasting a current account surplus of $25 billion for this year. Since the cumulative current account surplus from January to October is about $24.99 billion, it is possible that November and December may not generate a surplus or may even turn to a deficit. Regarding the possibility of a current account deficit in November and December, Kim said, "It is difficult to comment due to recent external uncertainties, but arithmetically, if November and December are at a balanced level, it might meet the forecast."

Professor Ha Jun-kyung of Hanyang University's Department of Economics expressed concern, saying, "As the global economy falls into recession next year, South Korea's exports will be adversely affected, and uncertainties in energy prices affecting imports will persist. The uncertainty regarding China's economy remains high, increasing downside risks for next year's current account."

The market expects that economic slowdown factors such as the impact of U.S. interest rate hikes and the Ukraine war will remain significant at least until the first half of next year, potentially leading to a further decline in exports. The Bank of Korea forecasts that the goods balance in the first half of next year will shrink to about $7 billion, less than half of this year's corresponding period. The recent supply chain disruptions have prompted advanced countries like the U.S. and Europe to raise export barriers, which is another negative factor. Representative examples include the U.S. Inflation Reduction Act (IRA), the European Union's Raw Materials Act (RMA), and the Carbon Border Adjustment Mechanism (CBAM).

Professor Kang Sung-jin of Korea University’s Department of Economics said, "In the short term, if energy prices stabilize, the goods balance is expected to return to surplus. However, since exports and imports are both trending downward, it is necessary in the long term to move away from a current account policy reliant on the goods balance and instead expand surpluses through non-trade balances such as the services balance, following an advanced country model."

At the emergency economic vice-ministerial meeting held that day, Bang Ki-seon, First Vice Minister of the Ministry of Economy and Finance, said, "There are considerable risks to exports due to the global economic slowdown and domestic logistics disruptions, so high monthly volatility in the current account is expected for the time being. We will make policy efforts to diversify export structures, continue energy-saving efforts, and actively support smooth domestic repatriation of overseas investment income to sustain improvements in the income balance."

This content was produced with the assistance of AI translation services.